System and method for managing tax-deferred retirement accounts

ABSTRACT

A system and method of managing tax-deferred retirement accounts that enable the participants to invest in exchange traded funds (ETFs) and to forecast and intelligently plan for their retirement savings needs. The system and method preferably allow each participant to select an asset allocation model pursuant to which their investments will be managed and periodically rebalance the portfolio of each participant based on the selected asset allocation model.

BACKGROUND

1. Field of the Invention

This invention relates generally to management of tax-deferredretirement accounts, and more particularly to a system and method ofmanaging tax-deferred retirement accounts that enables the participantsto invest in exchange traded funds (ETFs) and to forecast andintelligently plan for their retirement savings needs.

2. Description of the Related Art

Policy-makers and researchers have an acute interest in the growth ofpension plans and their relationship in influencing work and retirement,saving and consumption, and well-being in old age. Analysts concernedabout poverty and income sufficiency acknowledge that pensions play akey role in the well-being of the elderly. Traditional pension plans,such as defined benefit plans that promised each employee a certainamount of his or her salary at retirement, placed responsibility forretirement planning for each employee on the employer, making theemployer a “fiduciary.” However, over the past several years, there hasbeen a shift from defined benefit plans to self-directed definedcontribution plans, such as 401(k) plans. Consequently, with theproliferation of 401(k) plans, responsibility for retirement planninghas shifted away from the employer and now rests squarely on theshoulders of each individual plan participant. By and large, the planparticipants are not well equipped to handle such responsibility.

In 1995, researcher John Shoven confirmed that pension assets grewfaster than total wealth in the United States during the 1980's, leadingShoven to conclude that “pensions are how America saves.” At the sametime that pension wealth has grown, there has been a revolution in thepension industry, as defined contribution plans, and 401(k) plans inparticular, have become the pension plans of choice. Definedcontribution plans increased from 13 to 30 percent between 1975 and 1985and then to 42 percent in 1992. By 1997, defined contribution plans roseto 53 percent. See Defined Contribution Plan Dominance Grows AcrossSectors . . . , special report by Kelly Olsen and Jack Van Derhei,Employee Benefit Research Institute, October 1997, Special Report 190,Washington, D.C. By projecting trends on pension contributions, the U.S.Department of Labor in 1997 concluded that more money is going intoprivate 401(k) plans than all other private pension plans combined. Mostof the contributions are coming directly from workers.

At the same time, there was a similar shift in the responsibility formanaging assets in employer-sponsored retirement plans. Previously, theChief Investment Officers and Chief Financial Officers of employercompanies acted not only as the trustee for the plan but also as theinvestment officer for the plan. However, with the shift to definedcontribution plans, the overwhelming majority of workers participatingin 401(k) plans are required to manage the investment of theirretirement savings directly. In this brave new world, workers not onlyhave to determine when to start saving for retirement and how much tocontribute to their retirement accounts, they also must decide how toallocate their retirement funds across various types of assets.

Unfortunately, as illustrated by a Watson Wyatt study, participantdirected 401(k) plans are lagging behind institutional investors'returns in defined benefit plans by two percent (2%) annually. At firstblush, a two percent (2%) difference may appear insignificant; however,the difference over a thirty-year period is staggering. For workers, athirty-year period represents the average time horizon betweenmid-career and mid-retirement. Over a period of thirty years, $100,000invested at ten percent (10%) will earn $1,744,940, while the same$100,000 invested at eight percent (8%) will earn only $1,006,266. Inthis example, the missing two percent compounds to nearly three-quartersof a million missing dollars.

As reported by The Profit Sharing/401(k) Council of America, by the endof 2003 there were over 42 million 401(k) plan participants with $1.9Trillion invested. With the proliferation of participant-directed 401(k)plans, more employees are directing the investment of their pension planassets, despite the fact that most of them do not feel up to the task asevidenced by a number of surveys. The surveys reveal that mostparticipants do not have a sufficient understanding of investmentconcepts and principles in order to make their own, well-informedinvestment decisions. For example, in a 1996 survey by Merrill Lynch,53% of employees said that their employers do not provide sufficientinvestment related materials; 80% said that educational materials orassistance would help them make better decisions; and 66% said thatestimating the amount needed to be saved for retirement was the leastcovered topic. Similarly, in a Watson Wyatt survey of 622 companies, 66%of the employees rated printed information as not effective, 58% saidthat their plan does not project future account balances, and 90% saidthat their employers were not effective in communication. Clearly,401(k) participants do understand that they are not prepared to makebasic investment decisions which are necessary in order for them toachieve their retirement goals. Faced with overwhelming doubt,participants often turn to coworkers, friends, and the anecdotalinformation they read in newspaper and magazine articles for guidance inmaking their investment decisions. In 1996, Dalbar Financial Servicesreported that 83% of the respondents expect their employers to providethem with “investment education.” The September 1997 issue of Pensionand Investments confirms this trend: “Participant demand for investmenteducation and information grows . . . .” Participants are requestinghelp from their employers. Unfortunately, today's typical 401(k) planservice provider simply directs a participant's attention to numerousmutual funds, focusing on “past performance” rather than concentratingon the retirement goal of each plan participant. The consequence of the“performance disease” is low returns, high costs, and inattention to therisks and rewards of asset allocation.

Currently 401(k) service providers have no real solution for helpingparticipants meet their retirement goals. Firms such as FinancialEngines, Clear Choice, and Plan Tools, who are third party RegisteredInvestment Advisory firms, offer online investment advice throughgeneric risk/reward scenarios after the participant completes arisk/reward questionnaire. Based on the results of the questionnaireindicating the participant's risk tolerance, a portfolio of funds isrecommended. However, using this methodology, a portfolio is recommendedwhich may not meet the actual retirement needs of the participant.Furthermore, in the case of Financial Engines, the recommended portfolioonly illustrates the highest probability that the participant willachieve his or her retirement goal.

Another alternative currently available to participants is to choose anasset allocation model based solely on the participant's age. Thisalternative is offered by several mutual fund companies. Lifestyle fundsare designed under the assumption that every participant of the same ageshould have the same investment options, regardless of current financialstatus or future income needs. Lifestyle funds have proven to be anexpensive investment choice since mutual fund families add an additionalmanagement fee on top of the other management fees and costs of theunderlying funds.

The services offered by such firms as Financial Engines, Clear Choice,and Plan Tools are additional services that are not required to manageand administer a 401(k) plan. Consequently, those firms add additionalcosts to each plan participant. Furthermore, those firms do notparticipate in the selection process for choosing appropriate investmentvehicles for the plan. Consequently, those firms are not facilitatingthe plan sponsor or the participants in choosing appropriate investmentoptions for the plan. This deficiency completely precludes their abilityto recommend a well-structured asset allocation model.

Lifestyle funds are funds of funds created by mutual fund families.Participants usually are allowed to select one or more lifestyle fundsbased on their planned retirement date or using their current age. Thatis, as the participant moves closer to retirement age, the portfolio mixcontinues to increase in bonds and decrease in equities. According to astudy conducted by Hewitt Associates, participants don't even understandthe principle behind lifestyle funds and end up choosing severallifestyle funds for a portfolio mix. According to that study, most ofthe participants were not matching their risk profile with their age inorder to choose a lifestyle fund. “Many participants who used lifestylefunds weren't choosing one lifestyle fund, but allocating to severallifestyle funds at once,” said Lori Lucas, a defined contributionconsultant with Hewitt Associates. “Clearly, lifestyle funds are notbeing used as the simple, straightforward investment solution they areintended to be.”

According to a research study conducted by HeWitt, nearly a third (30%)of plans offered a lifestyle option in 1999. Peter Lynch, former managerof the Fidelity Magellan Fund, disputes the theory that a person's ageshould dictate the person's investment portfolio. In his book, Beatingthe Street, Lynch stated that “this popular prescription, stocks for theyoung, bonds for the old, is . . . obsolete.”

Another major shortcoming of lifestyle funds is the fact that lifestylefunds only rely on two of the five asset classes; i.e., stocks andbonds. To compound this shortcoming, in the stock class, the majority oflifestyle funds use 100 percent large cap stocks and in the bond class,the majority of lifestyle funds use 100 percent long-term bonds.

Another major problem with current 401(k) plans involves the highinvestment costs and expenses which participants are paying for theirmutual fund investment options. The 401k Provider Directory AveragesBook “found that investment expenses account for upwards of 81% of totalplan costs in smaller plans and 98% in larger plans.” Seventy-onepercent (71%) of all assets in defined contribution plans are mutualfunds, which carry high management fees. See Brief of US RetirementAssets 2003, Investment Company Institute, June 2004. Unfortunately,high fees and expenses result in lower retirement income for planparticipants.

Exchange traded funds have much lower fees and expenses than mutualfunds. However, to date, exchange traded funds have been available onlythrough self-directed brokerage accounts or collective trusts.Unfortunately, the commission costs associated with trading ETFs througha self-directed brokerage account makes it prohibitive for 401(k)participants who invest in incremental amounts each pay period.Similarly, plan sponsors who may wish to offer ETFs to their planparticipants through a collective trust are finding that the annualadministrative costs, per collective trust, average $5,000 plus, whichmakes collective trusts prohibitive. Therefore, the costs associatedwith self-directed brokerage accounts and collective trusts negate anybenefit participants might have enjoyed through those investmentvehicles.

Accordingly, it would be a significant advancement in the art to providea system and method of managing tax deferred retirement accounts thatenable the participants to realize the reduced costs of exchange tradedfunds and to forecast and intelligently plan for their retirementsavings needs.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a schematic block diagram of a system for managing taxdeferred retirement accounts in accordance with the present invention.

FIG. 2 is a flowchart of a method for managing tax deferred retirementaccounts in accordance with the present invention.

FIG. 3 is a sample computer software screen layout showing a data inputpage of a retirement calculator in accordance with the presentinvention.

FIG. 4 is a sample computer software screen layout showing a resultspage of a retirement calculator in accordance with the presentinvention.

FIG. 5 is a sample computer software screen layout showing a 401(k) taxadvantage calculator in accordance with the present invention.

FIG. 6 is a sample illustration of a moderate asset allocation model inaccordance with the present invention.

FIG. 7 is a flowchart of a payroll deposit process in accordance withthe present invention.

FIG. 8 is a flowchart of a payroll contribution process in accordancewith the present invention.

FIG. 9 is a further flowchart of a payroll contribution process inaccordance with the present invention.

FIG. 10 is a flowchart of a participant termination process inaccordance with the present invention.

FIG. 11 is a flowchart of a participant withdrawal process in accordancewith the present invention.

FIG. 12 is a flowchart of a portfolio rebalancing process in accordancewith the present invention.

FIG. 13 is a flowchart of an asset reallocation process in accordancewith the present invention.

DETAILED DESCRIPTION OF A PREFERRED EMBODIMENT

Referring to FIG. 1, a system 10 for managing tax-deferred retirementaccounts in accordance with the present invention preferably comprises acomputer processor 12 with an associated memory 14. Computer processor12 may be any suitable computer processor, such as a general purposecomputer, a workstation, a personal computer, a microprocessor, adigital signal processor, or the like. Computer processor 12 ispreferably connected via a network 16 to a plurality of other computerprocessors 18 that are respectively associated with a plurality ofparticipants P₁ through P_(N) in one or more tax-deferred retirementplans, such as 401(k) plans. Network 16 may be any suitable network,such as the Internet. The record keeper (RK) 28 is the person or entitythat manages computer processor 12 to implement the method of thepresent invention. Computer processor 12 is preferably further connectedvia network 16 to a computer processor 20 associated with a securitiesbroker, a processor 24 associated with the custodian of the plan assets,a processor 25 associated with the payroll provider, and a processor 26associated with the plan sponsor. Broker computer 20 is preferablyconnected to another computer processor 22 associated with a stockexchange. Although only one plan sponsor 26, custodian 24, payrollprovider 25, broker 20, and stock exchange 22 are shown for the sake ofsimplicity, persons of skill in the art will recognize that more thanone plan sponsor, custodian, payroll provider, broker, and stockexchange may be included in system 10. A computer software program,which includes a record keeping system (RKS) as further describedherein, is preferably stored in memory 14 for execution on computerprocessor 12 to carry out the method of the present invention as furtherdescribed below.

A system 10 and method in accordance with the present inventionpreferably focuses on the participants' (account holders') retirementgoals. In the case of an individual investing for retirement through,for example, a 401(k) plan offered by an employer, the system and methodfocus on the plan participant's retirement goals, and preferably assistthe plan participant in achieving those goals through a methodimplemented in computer software. Preferably, that software is madeaccessible to a plan participant through a password-protected Internetwebsite. In a preferred embodiment, the present method providesparticipants with investment concepts and principles, answers tofrequently asked questions (FAQs) on investing and retirement planning,articles on finances and investments, investment calculators, andpre-designed asset allocation models.

FIG. 2 illustrates a retirement calculator 30 of a preferred embodimentof the computer software that participants may use to determine how muchmoney should be saved each year in order for each participant toestablish a retirement fund of sufficient size to pay the participant'sliving expenses during the retirement years. Preferably, the calculator30 determines the participant's retirement goals as indicated at 32 andshows the participant the rate of return and annual contribution to the401(k) savings account required to achieve those goals. As indicated at34, the calculator 30 preferably also assigns an asset allocation model34 appropriate for the participant based on the participant'sinformation, which is further discussed below. Preferably, a defaultasset allocation model is assigned, but a participant may change his orher asset allocation model, if desired. As shown at 36, system 10preferably allows each participant to issue a sell order for currentasset allocations and to issue a buy order for new asset allocations asshown at 38. As indicated at 42, each participant is also preferablyallowed to change the percentage of his or her payroll that will becontributed to the retirement plan each pay period. System 10 alsopreferably notifies the participant's payroll provider to change theparticipant's contribution percentage in accordance with theparticipant's wishes as illustrated at 44. As indicated at 40, futurepayroll contributions to the plan are then invested according to theparticipant's specified contribution percentage and asset allocationmodel.

As shown in FIG. 3, a retirement calculator in accordance with thepresent invention preferably provides user-entry fields in which aparticipant may enter data for a series of parameters including his orher current age, a proposed retirement age, an estimated annualinflation rate, a target annual rate of return, an annual income, anestimated annual salary increase percentage, the percentage of currentincome desired at retirement, the participant's/employee's contributionpercentage, the employer's matching contribution percentage, if any, thecurrent value of the participant's 401(k) savings account, the value ofthe participant's other tax-deferred retirement savings accounts, suchas an IRA, and the value of any taxable retirement savings accounts,such as money market accounts. For convenience, the system preferablyprovides an on-screen calculator that may be used to calculate anydesired quantities.

Historically, inflation has averaged about 3.5% over the course of the20th century, so a reasonable default value for inflation is about 3%.Factoring in inflation helps estimate future income needs in inflatedfuture dollars. Preferably, the retirement calculator computes thepercentage of current annual income, which the participant indicated heor she will need by retirement age, adjusted each year for inflation orsalary increases, whichever is greater. If the annual salary increasesby 5%, for example, the future income need will increase by 5% since 5%is greater than the historical inflation rate of 3%. However, if theannual salary increases by only 2%, for example, the future annualincome needed will be computed based upon the historical rate ofinflation of 3%. Of course, the percentages indicated herein areexemplary and not limiting to the present invention.

To maintain the participant's desired lifestyle at retirement, theparticipant enters the desired percentage of his or her current incomedesired at retirement. In order to calculate the retirement funds neededbased on the participant's desired income at retirement, the first yearof retirement income is preferably compounded by 3% for inflation andthe number of years of retirement based on life expectancy. As reportedin the 1997 Replacement Ratio Study conducted by Georgia StateUniversity, experts predict that a participant will need approximately65 to 85 percent of the participant's current income to maintain his orher present lifestyle in retirement. Of course, the needed funds willvary from person to person depending on the desired lifestyle, and thepercentages used herein are exemplary and not limiting to the presentinvention.

After retirement begins, although some expenses may drop, such as workrelated expenses and paying into Social Security and other taxes, otherexpenses may either stay the same or increase. A person's basic livingexpenses typically stay the same; however, health care costs and medicalexpenses often increase. In the early retirement years, some expenses goup because the retiree has new found freedoms with time to travel,rediscover old hobbies, or pick up new ones. During the middleretirement years, some expenses may drop as the retiree travels less andstays closer to home. In the later years, income needs are largelydetermined by health care costs, as reported by National Underwriter in1997. Those factors should be taken into account, if possible, as aparticipant plans for the desired level of income during retirement.

The annual income needed by retirement age is computed taking intoconsideration inflation and salary increases. This resulting figure isthen compounded at 3% annually, for inflation, until life expectancy.Life expectancy is preferably estimated using the IRS Unisex LifeExpectancy Table from IRS Publication 590 or some other suitable lifeexpectancy data. Unquestionably, people now are living longer, whichfurther complicates retirement planning. A study published in theMay/June 1999 issue of the Bank Securities Journal estimates that 60% oftoday's 65 year olds will live to age 85, 12% will reach age 95, and 8%will live to celebrate their 100th birthday. Life expectancies aretypically stated as statistical averages, meaning that a given personcould live more years or fewer years than the stated life expectancy.Approximately 50 percent of all people die before life expectancy andthe other 50 percent live well beyond their life expectancy.

The participant preferably enters a contribution rate and a companymatch, if any, for his or her 401(k) savings plan. The contributionrates determine the participant's annual savings. The annual savings arecompounded based on the participant's increase in salary, untilretirement age, and are also compounded by the targeted rate of returnin order to determine the future value of the participant's 401(k)savings.

Not surprising, most participants contribute up to the level of thecompany match. Generally speaking, this is viewed as a positive resultindicating that participants understand the mechanics of the match andappreciate its value. However, according to a PlanSponsor Exclusive 2003Recordkeeping Survey, there is evidence which suggests that someparticipants believe the match is a company-sanctioned benchmarkrepresenting either (i) how much they should save or (ii) a cap on themaximum amount they can save. In reality, the Internal Revenue Service(IRS) allows a participant to contribute up to 100% of the person'ssalary to a 401(k) plan, subject to an annual maximum dollar amount,which is presently $13,000 for the year 2004, for example. Any employermatching contributions will be additional savings above the IRS's annuallimit. Additionally, if a 401(k) plan includes a “catch-up” provisionfor employees age 50 and over, such participants may contribute anadditional “catch-up” amount, which is $3,000 for the year 2004, forexample.

A participant may enter the market value of any other tax-deferredand/or taxable accounts which are earmarked for retirement. If theparticipant has several statements they may use the online calculator toadd the value of the accounts and copy and paste in the appropriateboxes.

The rate of return entered on the data input page is preferably used forall financial calculations and projections. If a participant enters arate of return higher than the historical rate of returns earned duringa given period, such as 1973 to 2003, for example, the participantpreferably will receive an error message, such as “Rate of Return (ROR)exceeds Historical ROR for asset allocation models. Enter a lower rateof return.” For example, during the time period beginning 1973 andending 2002, earning a rate of return in excess of 14 percent felloutside the scope of the historical returns for each of the assetclasses (cash, stocks, and bonds); including, any combination of theclasses: U.S. Bonds, Money Market, Small Cap Stocks, Large Cap Stocks,International Stocks.

As shown in FIG. 4, the computer software of the present inventionpreferably calculates the results based on the participant's input anddisplays the results. The results page preferably illustrates the annualpercentage of income the participant must save in order to establish hisor her needed retirement fund. The results page also preferablyidentifies the name of the asset allocation model that matches theparticipant's targeted rate of return. If the participant is not takingadvantage of the employee's maximum matching contribution, the resultspage preferably alerts the participant to this fact. If the projectedfunds are insufficient to meet the participant's goals, the results pagealso preferably alerts the participant to the fact that he or she is notcontributing enough in order to achieve his or her retirement goals andidentifies some possible courses of action to remedy that situation,such as targeting a higher rate of return (ROR), saving more,re-evaluating the income needed at retirement, or retiring at a laterage.

The results page also preferably provides more information for theparticipant to consider if the projections demonstrate a shortage atretirement. To determine if a participant will have a shortage (deficit)in his or her retirement fund by the desired retirement age, theestimated future value of the current retirement portfolio(s) issubtracted from the estimated retirement fund need. If the calculationsproject a deficit by the time the participant reaches retirement age,the participant is preferably invited to consider several options, suchas:

(a) consider saving in a tax-deferred account by making contributions,preferably maximum contributions, to a tax-deferred retirement account;e.g., IRA, 401(k) Plan, or Roth IRA;

(b) consider reallocating the investment portfolio in order to increasethe target rate of return on investments;

(c) consider delaying retirement because each year retirement is delayedincreases the investment contributions and decreases the retirementwithdrawals;

(d) consider reevaluating future income needs with a view towarddecreasing the desired amount, if possible.

By the time a participant reaches retirement age, the participant willneed a retirement fund from which he or she may pay his or her annualliving expenses, through life expectancy. The results page preferablyillustrates the estimated retirement fund needed, in future value, i.e.,taking into consideration inflation and years of retirement based onlife expectancy. The participant's targeted rate of return is used tocalculate the growth of the savings, for all accounts earmarked forretirement, up to retirement age. The future values are then totaled toillustrate the participant's projected retirement savings needed. If theprojections illustrate that the participant will have a deficit atretirement age, the results page preferably illustrates the dollaramount of the deficit and also preferably illustrates the additionalpercentage annual contribution the participant will need to make inorder to reach his or her retirement goal.

In the embodiment of FIG. 4, the retirement calculator preferablyreturns information separated into three groups, namely, a savingsstatus and future value chart, a contribution summary, and a list ofassumptions used by the retirement calculator in arriving at the savingsand future value numbers. The savings status and future value group isnamed “Savings Earmarked For Retirement,” and provides a participantwith information on the current value of the participant's 401(k)account, the current value of other tax-deferred retirement savingsaccounts, the current value of taxable retirement savings accounts, thefuture value of retirement savings, the size of the fund calculated asneeded for retirement, the shortfall (or excess, as the case may be) ofthe future value of the retirement fund with respect to the needed fund,the amount that must be set aside annually to make up that shortfall,both as a dollar amount and as a percentage of annual income needed, andthe asset allocation model.

The contribution summary is provided under the “Summary” label in FIG. 4and preferably informs the participant whether the participant'scontribution is sufficient to reach the participant's retirement goals.The contribution summary also preferably informs a participant of thesteps that might be taken to re-evaluate the investment approach, suchas targeting a higher rate of return (ROR), saving more money,re-evaluating the income needed at retirement, or retiring at a laterage.

The list of assumptions used by the retirement calculator in arriving atthe savings and future value numbers is preferably provided under the“Assumptions” summary in FIG. 4. In this embodiment, those assumptionsinclude the participant's current age, desired retirement age, lifeexpectancy, years of investing, years of retirement payout, marginal taxrate, contribution election percentage, target annual rate of return,estimated annual rate of inflation, estimated annual salary increase,current annual income, percentage of current income desired atretirement, and calculated retirement income need taking into accountestimated inflation and salary increases.

Preferably, a tax advantage calculator is also provided to allow aparticipant to determine what tax advantages may be obtained byparticipating in a tax-deferred account such as a 401(k) plan. FIG. 5illustrates one embodiment of such a tax advantage calculator. As seenin FIG. 5, a participant enters a value in the annual income amountfield, the targeted rate of return field, the employee contribution rate(which is preferably a percentage) field, and a field for the matchingcontribution of the participant's employer, if any. The participant'stax rate bracket is also preferably stored or entered by theparticipant. The calculator preferably uses that information to returnprojected investment performance data to the participant, as in thetable illustrated in FIG. 5. Using the information input by theparticipant, the calculator multiplies the participant's contributionrate by the annual income to return the employee's total annualcontribution to the 401(k) plan. The calculator also preferablyillustrates tax advantages associated with saving that amount through acompany's 401(k) plan as compared to saving the same amount in a taxableaccount, and provides a comparison of the future value of thoseaccounts. In the table of FIG. 5, for example, the future value of thetaxable savings and 401(k) savings are illustrated for 5, 10, 15, 20,and 25 years. Additionally, the calculator preferably provides a fieldentry for a participant to enter a desired number of years to determinethe respective future values of those accounts in a specified number ofyears. Using the calculator, then, the plan participant is able tochange, for example, the rate of return and contribution percentage todetermine what impact those variations will have on the future value ofthe 401(k) and taxable accounts for a given number of years in thefuture. Thus, the tax advantage calculator of the present inventiondemonstrates the tremendous tax advantage that participants gain bysaving for retirement through their company's 401(k) plan.

Pre-Designed Asset Allocation Models:

The performance of a portfolio has two primary factors: (i) investmentreturn and (ii) volatility. A ten-year Brinson Study concluded that93.6% of investment performance is based on allocation between the assetclasses, e.g., cash, stocks, and bonds. The fundamental tenet that assetallocation has the greatest impact on long-term total investment returnshas been embraced by large institutions and sophisticated investors, whoare increasingly turning to asset-class investing according to methodsknown in the art. Asset-class investing involves investing andcommitting to whole markets rather than buying individual securities.

Most plan participants are unlikely to acquire the skills needed tobuild suitable portfolios like professional fiduciaries of institutionalplans. Therefore, in accordance with the present invention, each planparticipant is preferably defaulted to a pre-designed asset allocationmodel, which the participant may change at any time if desired. Byplacing a participant in a pre-designed asset allocation model, theparticipant is able to realize the benefits of the “best practices”presently used by institutional investors instead of being relegated toindiscriminate fund picking, which is thrust upon them by other serviceproviders, whose “solution” is to offer an overabundance of fundchoices.

For example, some predefined asset allocation models based on historicalreturns for each asset class from 1973 to 2003 as reported byWiesenberger, Barclays Global Investors, N.A. and Dimensional FundAdvisors may be composed as follows:

(a) Aggressive: 6 down years; lowest one-year return of −25.55%; highestone-year return of 44.65%; annualized historical rate of return of13.22%;

(b) Conservative: 4 down years; lowest one-year return of −4.31%;highest one-year return of 20.45%; annualized historical rate of returnof 9.18%;

(c) Growth: 6 down years; lowest one-year return of −14.48%; highestone-year return of 32.43%; annualized historical rate of return of11.35%;

(d) Moderate: 6 down years; lowest one-year return of −11.56%; highestone-year return of 29.75%; annualized historical rate of return of11.13%;

(e) Preservation: 1 down year; lowest one-year return of −0.09%; highestone-year return of 20.49%; annualized historical rate of return of8.36%.

FIG. 6 illustrates a sample moderate asset allocation model.

Of course, historical performance does not guarantee future performance,and the foregoing examples are by way of illustration only and are notlimiting to the present invention.

Automatic Portfolio Rebalancing:

When an asset in a portfolio performs extraordinarily well or,conversely, performs poorly, its portfolio weighting will increase ordecrease, which in turn will throw the participant's target assetallocation out of alignment. To return the portfolio to its targetcomposition, a participant would have to sell enough of theover-weighted assets and buy enough of the under-weighted assets inorder to bring the portfolio back in alignment with the criteria fordivision between the asset classes for the model.

In order to maintain the division criteria for each participant'sallocation model, the present invention preferably automaticallyrebalances each participant's portfolio on a regular basis, such as aquarterly basis, for example. To rebalance the portfolios, a system inaccordance with the present invention sells the investments that haveover-performed for the quarter and buys the investments that haveunder-performed to bring the portfolio back in alignment with theapplicable asset allocation model.

Referring to FIG. 12, the record keeping system (RKS) preferablyautomatically rebalances each participant's portfolio based on theapplicable asset allocation model as indicated at 122. As indicated at124, a pending transaction is created to sell all shares of ETFs in eachparticipant's account. Next, the system totals all shares of ETFs foreach plan as indicated at 126 and totals all shares of ETFs for allplans as indicated at 128. Then a sell order is sent to the broker tosell all whole shares as indicated at 130. After the sell is executed,the broker sends a report to the RK for the executed trade price, sharessold, and dollar amount received at the custodian for each ETF sold asindicated at 132. The RK preferably sends a confirmation report by planto the custodian as indicated at 134. The RK divides the omnibussettlement amount by plan and then divides the plan settlement amount byparticipant and posts the sales to each participant's account asindicated at 136. A buy is then created for each participant based oneach participant's percent allocated for each ETF in the participant'sasset allocation model to generate a trade of the total dollar amountfor all participants and plans as indicated at 138. As indicated at 140,each participant's account is credited for any cash dividends receivedfor ETFs. After totaling all buys of ETFs for each plan and all buys ofETFs for all plans, buy orders are sent to the broker to buy shares ofETFs as indicated at 142. As indicated at 144, after the buys arereceived and executed by the broker, the broker sends a report to the RKfor the executed trade price and shares purchased for each ETF. The RKthen sends a confirmation report by plan to the custodian as indicatedat 134. The RK then divides the omnibus ETF buys, per plan, per wholeshares as indicated at 146, and then credits fractional shares toparticipants as indicated at 148. Finally, the appropriate cash balanceis credited to each participant's account as indicated at 150. In thismanner, each participant's account is rebalanced in accordance with theappropriate asset allocation model.

ETF Trading Process:

Referring to FIG. 7, the payroll provider preferably uploads payrollfiles in the RKS as indicated at 50. Each company's payroll filespreferably contain each participant's deferral contribution identifiedby the source, e.g., employee pretax, employer match, catch up, loanpayment, and/or profit sharing contribution. The RK then sends an ACHrequest to the plan sponsor's bank to pull payroll as indicated at 52.Next, the custodian receives the payroll as indicated at 54, and the RKSis automatically notified of the payroll deposit as indicated at 56.

As shown in FIG. 8, RKS preferably stores each participant's assetallocation model (AAM) in memory as indicated at 60, which determineswhich ETFs are to be purchased for each participant. Based on thatinformation, the software computes the total buy amount for eachparticipant by ETF as indicated at 62, then computes the total buyamount for each plan by ETF as indicated at 64, and then computes thetotal buy amount for all plans by ETF as indicated at 66. Preferably,one trade file is created per ETF for all plans, which results in anomnibus trade file for each ETF covering all applicable plans andparticipants. Next, the software sends a buy order to the broker for allthe appropriate ETFs before market close as indicated at 68. The RKSautomatically receives an execution report from the broker as indicatedat 70, and a confirmation message is preferably sent to the custodian asindicated at 72.

Referring to FIG. 9, the execution report that the RKS receives from thebroker (as indicated at 74) contains whole shares of the appropriateETFs as indicated at 76. The RKS preferably divides the executed trades(purchased ETFs) by whole shares per plan as indicated at 78, and theRKS preferably divides the executed trades per participant according toeach participant's asset allocation model as indicated at 80. Eachparticipant's holdings are thus held as fractional shares per eachcontribution sequence as indicated at 82, and the appropriate cashbalance is credited to each participant's account as indicated at 84.

Trading ETFs in a 401(k) plan on an omnibus level allows theparticipants to reap the benefits of ETFs without incurring highbrokerage commissions. This method significantly lowers the overallcosts for participants; for example, costs may be reduced from 30 to 160basis points or more over retail mutual funds.

John Bogle explained the logic of lower costs in his paper, The FirstIndex Mutual Fund: A History of Vanguard Index Trust and the VanguardStrategy. In the academic world, the Index Thesis demonstrates that allinvestors, as a group, are the market. Since all investors are themarket, there is no way they can outpace the market. However, that factholds true only before the cost of investing is considered. Afterinvestment costs are considered, the returns of all investors inevitablylag the market by the amount of the cost.

The inclusion of ETFs, which cover all of the major indices, alsoprovides the present invention more latitude in designing assetallocation models. This latitude allows the present invention theability to offer participants well-structured, diversified assetallocation models; e.g., preservation, conservative, moderate, growthand aggressive.

Participant Termination.

Referring to FIG. 10, when a participant terminates employment, such aparticipant usually requests to withdraw his or her account balance fromhis or her 401(k) account as indicated at 90. Such a withdrawal requestis preferably made online. Based on the withdrawal request, a pendingtransaction is created to sell all shares of ETFs in the participant'saccount as indicated at 92, and an order is sent to the broker to sellwhole shares of ETFs as indicated at 94. After the sell is executed, thebroker preferably sends a report to the RK reflecting the executed tradeprice, the number of shares sold, and the dollar amount received at thecustodian for each ETF sold. A confirmation is preferably sent to thecustodian as indicated at 96, the RKS processes an in kind transfer offractional shares to the appropriate plan as indicated at 98, and theterminated participant receives the value of the fractional in kindtransferred ETF shares previously owned by the participant as indicatedat 100 based on the executed price from the sale of the whole shares.Finally, the terminated participant receives the proceeds from the saleof the appropriate whole shares and fractional shares as indicated at102.

Participant Withdrawal.

As shown in FIG. 11, participants generally may request a withdrawalfrom their accounts for a loan, a hardship, or retirement income. Such awithdrawal request is preferably made online as indicated at 110,whereupon a pending transaction is created to sell a dollar amount ofETF shares equal to the withdrawal requested as indicated at 112. Asindicated at 114, the RKS preferably calculates the number of sharesneeded to be sold in order to deliver the dollar amount requested, and asell order is sent to the broker to sell whole shares as indicated at116. After the sell is executed, the broker preferably sends a report toRK reflecting the executed trade price, the number of shares sold, andthe dollar amount received at the custodian for each ETF sold. RKpreferably sends a confirmation report by plan to the custodian asindicated at 118. Finally, the participant receives the proceeds fromthe sale of whole shares as indicated at 120.

Participant Rebalance or Change of Model.

Referring to FIG. 13, participants preferably may request a rebalance orchange in their asset allocation model. Again, such a request ispreferably made online as indicated at 152. In response to such arequest, a pending transaction is preferably created to sell all sharesof ETFs in the requesting participant's account as indicated at 154, anda sell order is sent to the broker to sell whole shares as indicated at156. After the sell is executed, the broker preferably sends a report tothe RK reflecting the executed trade price, the number of shares sold,and the dollar amount received at the custodian for each ETF sold asindicated at 158. The RK preferably sends a confirmation report by planto the custodian as indicated at 160. The RKS preferably processes anin-kind transfer of the fractional shares to the plan as indicated at164, and the participant receives the value of such fractional shares asindicated at 162. The participant then receives the proceeds from thesale of whole shares and fractional shares as indicated at 166. Then,transactions for buys are generated to purchase other ETFs for theparticipant based on the participant's new asset allocation model asindicated at 168, and corresponding buy orders are sent to the broker tobuy whole shares as indicated at 170. After the buys are executed, thebroker sends a report to the RK reflecting the executed trade price andthe number of shares purchased for each ETF as indicated at 172, and theRK preferably sends a confirmation report by plan to the custodian asindicated at 160. The new ETF shares are then posted to theparticipant's account as indicated at 174, and the corresponding cashbalance is credited to the participant's account as indicated at 176.

As persons skilled in the art will appreciate, the present inventionthus provides at least the following benefits: diversified investmentoptions, including ETFs, which cover all the major indices; reducedmanagement fees; well-structured, pre-designed asset allocation models;financial tools to enable a participant to accurately determine his orher retirement needs and choose an asset allocation model which willassist the participant in actually reaching his or her retirement goals;and the availability of sufficient investment information so thatparticipants of any sophistication may make their own well-informedinvestment decisions.

The combination of these benefits increases the chances that aparticipant will retire with an adequate retirement fund. To put thesebenefits in perspective, one must keep in mind that fees and performancereturns have a direct relationship, i.e., investment fees reduce thereturns of each fund by the amount of the investment fees. For example,by reducing participants' fees by 97 basis points annually, an averageparticipant with a $50,000 balance and an annual contribution of $12,000per year will have $120,435 more in their retirement portfolio in 20years, $243,321 more in 25 years, and $463,647 more in 30 years.

According to a Public Agenda Study, forty-six percent of Americans havesaved less than $10,000 for retirement, only twenty-nine percent ofpre-retirees (the 51 to 61 age group) have saved $100,000 or more andonly nineteen percent of our work force save each time they receive apaycheck. Instead of guessing how much money the participant will needby retirement age, the present invention allows a participant to perform“what if” scenarios in order to accurately determine the amount of moneythey will need in retirement. In this way, a participant can use thetools of the present invention to illustrate whether the participantneeds to contribute more to his or her retirement fund in order to reachhis or her goal.

The present invention is the first and only means for a 401(k) serviceprovider to offer ETFs as investment options in 401(k) plans withoutrequiring each participant to either establish a self-directed brokerageaccount or invest in ETFs by purchasing units of a “collective trust.”The present invention offers investment in ETFs without theseprohibitive costs attached by trading on an omnibus level, which enablestrading costs for each participant to amount to less than a penny on thedollar for each trade.

Although the foregoing specific details describe a preferred embodimentof this invention, persons reasonably skilled in the art will recognizethat various changes may be made in the details of this inventionwithout departing from the spirit and scope of the invention as definedin the appended claims and considering the doctrine of equivalents.Therefore, it should be understood that this invention is not to belimited to the specific details shown and described herein.

What is claimed is:
 1. A system for managing tax-deferred retirementaccounts, comprising: a computer processor; a computer readable mediumcomprising instructions executable by said computer processor formanaging a plurality of tax-deferred retirement accounts for a pluralityof participants; said computer readable medium further comprisinginstructions for allowing said plurality of participants to conductcalculations of estimated retirement savings based on a plurality ofparameters selectable by said plurality of participants; said pluralityof tax-deferred retirement accounts allowing each of said plurality ofparticipants to invest in a portfolio comprising a plurality of exchangetraded funds according to an asset allocation model; said computerreadable medium further comprising instructions for periodicallyrebalancing said portfolio according to said asset allocation model. 2.The system of claim 1 wherein said plurality of tax-deferred retirementaccounts comprise 401(k) accounts.
 3. The system of claim 1 wherein saidcomputer readable medium further comprises instructions for allowingsaid plurality of participants to conduct calculations illustrating taxadvantages of saving in said plurality of tax-deferred retirementaccounts versus saving in a taxable account.
 4. The system of claim 1wherein said asset allocation model may be set by default.
 5. The systemof claim 1 wherein said asset allocation model may be selected by eachof said plurality of participants.
 6. The system of claim 1 wherein saidplurality of exchange traded funds are purchased by omnibus trading. 7.The system of claim 1 wherein said plurality of parameters are selectedfrom the group consisting of current age, proposed retirement age,estimated annual inflation rate, target annual rate of return, annualincome, estimated annual salary increase percentage, percentage ofcurrent income desired at retirement, participant contributionpercentage, employer matching contribution percentage, current value of401(k) savings account, current value of other tax-deferred retirementsavings accounts, and current value of any taxable retirement savingsaccounts.
 8. A method of managing tax-deferred retirement accounts,comprising: providing a plurality of tax-deferred retirement accountsfor investment by a plurality of participants; providing a computerizedsystem that allows said plurality of participants to conductcalculations of estimated retirement savings based on a plurality ofparameters selectable by said plurality of participants; allowing eachof said plurality of participants to invest in a portfolio comprising aplurality of exchange traded funds according to an asset allocationmodel; and periodically rebalancing said portfolio according to saidasset allocation model.
 9. The method of claim 8 wherein said pluralityof tax-deferred retirement accounts comprise 401(k) accounts.
 10. Themethod of claim 8 further comprising: allowing said plurality ofparticipants to conduct calculations illustrating tax advantages ofsaving in said plurality of tax-deferred retirement accounts versussaving in a taxable account.
 11. The method of claim 8 wherein saidasset allocation model may be set by default.
 12. The method of claim 8wherein said asset allocation model may be selected by each of saidplurality of participants.
 13. The method of claim 8 wherein saidplurality of exchange traded funds are purchased by omnibus trading. 14.The method of claim 8 wherein said plurality of parameters are selectedfrom the group consisting of current age, proposed retirement age,estimated annual inflation rate, target annual rate of return, annualincome, estimated annual salary increase percentage, percentage ofcurrent income desired at retirement, participant contributionpercentage, employer matching contribution percentage, current value of401(k) savings account, current value of other tax-deferred retirementsavings accounts, and current value of any taxable retirement savingsaccounts.